Now that you know a little bit about the ways that the Forex market can be traded, it’s time to delve a little bit deeper and take a look into how the market is analyzed to make the best trades. After all, the entire purpose of trading is to make a profit, right? And in order to do that you need to know how to analyze the market and recognize the best times to make trades.
There are two basic ways in which you can analyze the currency market. At its most fundamental level, analyzing the market depends on viewing the reasons why price movements occur. These causes could be related to political, social and economic forces that affect supply and demand. Historical data can also be used for making predictions regarding the direction of prices in the future.
Charts are the primary means by which the market is analyzed. Such charts can be used for identifying both trending and ranging markets. Recurring patterns can be recognized through careful observation of charts regarding price movements in the future.
Practically all traders have their own favorite types of charts that can be used for analyzing the market. Really, a chart is just a visual representation of price movements within the market. A chart demonstrates interactions that occur between buyers and sellers. Charts can also show the way in which a certain asset is valued by the market. There are three important types of charts. They are:
- Bar charts
- Candlestick charts
- Line charts
There are several critical pieces of information that can be gleaned by traders through the use of bar charts. They are:
- High price
- Low price
- Opening price
- Closing price
Perhaps one of the best things about bar charts is that they can used to analyze price activity over practically any time period, including within just the past few minutes over even over a month or longer.
Candlestick charts are similar to bar charts in that they reflect the opening closing, high and low prices for a certain time period. The difference between bar charts and candlestick charts is that the body of a candlestick chart will be representative of the range that exists between the opening and closing price. When you see the body portion of a candlestick chart filled in with either black or red, this indicates that the opening is higher than the closing.
When you see the body part is filled in with blue or white, this indicates that the opening is lower than the closing. A bar chart ultimately places more emphasis on the way the closing price progresses from bar to bar while a candlestick chart better emphasizes the relationship that exists between the closing and opening price. Candlestick charts are typically more popular than a bar chart or even a line chart because they are usually perceived as being more appealing visually.
Line charts do not typically present as much information as candlestick or bar charts because they only demonstrate the closing price over a series of time periods. Consequently, line charts are usually best used for measuring the overall direction of a long-term trend.